How tax-exemption for employer-sponsored health insurance is destroying the US health care system

By | 1 February, 2018

In the United States, employees do not have to pay payroll or income taxes on employee-sponsored health insurance benefits, a policy that is destroying that is destroying the US health care system because:

  1. It abandons the people who need health insurance most: if you become too sick to work, you will lose your employer-provided health insurance too! “Citizens in any other industrialized country have permanent, portable insurance not tied to a particular job in a particular country.”
  2. It causes job lock: that is, they force people to work at unsuitable jobs, unsuitable hours, or work when they shouldn’t be working altogether—only to maintain health care benefits. This leads to economic inefficiencies, poor job performance, personal dissatisfaction, and sometimes even further decline in health and higher health care costs!
  3. It forces people out of insurance policies—and providers they like—every time they change jobs: one should have nothing to do with the other!
  4. It disincentivises insurers from making long term business decisions that relate to improving their insured population’s health (because employees are more likely to switch policies with every changing job).
  5. It limits consumer choices: you can get only a policy that your employer sponsors, even if it’s not suitable for you.
  6. It leads to conflict with employers: in situations where you are not religiously or ideologically compatible with your employer (e.g., birth control, abortion, whatever). Why fight with your boss, when we can set up a system where you can ditch your employer-sponsored policy and buy whatever you want on the free market (with the extra cash you get from your employer instead of the health insurance benefit?)
  7. It can violate your privacy rights: do you really want your employer all up in your business with regard to your health care?Broken health care
  8. Intermediation (someone else is doing the buying for you) always increases spending and waste: People tend to pay more when they don’t do the negotiations themselves—less “skin in the game.”
  9. It causes you to buy more insurance than you need: Suppose you decide you’d rather pay out of pocket (“self-insure”) for anything less than $1,000. Your out-of-pocket payment often won’t be tax deductible, while the employer provided insured portion would be. As a consequence, you are perversely incentivized to buy, through your employer, a low-deductible policy—which is more expensive overall—just for the tax benefit! As Dr. Milton Friedman wrote, “If the tax exemption for employer-provided medical care … had never been enacted, the insurance market for medical care would probably have developed as other insurance markets have. The typical form of medical insurance would have been catastrophic insurance (i.e., insurance with a very high deductible).”
  10. It makes people careless about prices: if your deductible is very low, you don’t care to negotiate prices when paying for health care. “Employees are likely to do a better job of monitoring medical care providers—because it is in their own interest—than is the employer or the insurance company or companies designated by the employer.
  11. The benefit is regressive (benefits the rich more than the poor): “The benefits of the tax exclusion flow disproportionately to those at the top of the income distribution, since the value of the exclusion rises with the individual’s income tax rate and richer individuals are more likely to have insurance and to have more generous plans.”
  12. It raise insurance costs for the unemployed: The healthy worker effect says that “Workers usually exhibit lower overall death rates than the general population because the severely ill and chronically disabled are ordinarily excluded from employment.” In other words, people who are employed tend to be healthier than the general population as a whole. This leaves most of the sick and unemployed to pay higher prices in the non-employer sponsored market. “There’s little societal value to enabling healthy people to gather together to insure themselves to the exclusion on sicker individuals.”
  13. It’s illogical: there simply is no reason why employer-sponsored health insurance plans should be exempted, but not privately purchased plans, or even food or shelter:

For these reasons, tax exemption for employer-sponsored health insurance should be disallowed, perhaps phased out over time to allow return to a more rational healthcare system.


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